From the author of

From the author of

Offshore outsourcing is everywhereboardrooms, newspapers, magazines,
cable news, even chat groups. The noise quotient around offshore outsourcing is
reaching epic proportions. In this article, we outline what's taking place
in offshore outsourcing and its potential impact on your job. We separate the
fads from the trends to assess the underlying market dynamics and help you
better navigate 2004.

Offshore Outsourcing: Fad or Trend?

Offshore outsourcing, especially in software application development and
maintenance, manufacturing, and logistics, is nothing new. Companies have been
outsourcing offsite or offshore for at least two decades. What is new is
the rapid growth in business process offshore outsourcing in areas such as
customer care, transaction processing, finance and accounting, human resources,
desktop support, and software development.

Why is it happening? To appease Wall Street, companies in the sluggish U.S.
economy have resorted to a strategy of widespread cost-cutting as a way to make
their earnings look more attractive. Management's actions to reduce costs
quickly were predictable: Because employee salaries make up a significant
percentage of operating costs, replace those employees with cheaper offshore
labor to increase the profits.

However, like all overhyped management innovations, offshore outsourcing is
bound to reach a short-term peak, especially in information technology. We have
reached this conclusion by looking at the cycle followed by previous
process-improvement innovations such as Total Quality Management, reengineering,
and Six Sigma.

The Slope of Hype. Offshore outsourcing is currently in a
"honeymoon period." In periods of hype, many companies initiate
projects to gain experience with the current innovation. They also are often
spurred into action simply because a competitor in the industry is doing it. We
saw a similar trend with e-commerce and e-business in the late 1990s. Every
company had to have an e-commerce strategy, and many took actions that in
hindsight don't seem logical. In this period, a number of vendors enter the
market and want to become your "trusted advisor" in the race to
offshore. Venture capitalists fuel the hype by investing in a variety of
startups.

The Slope of Despair. Usually the honeymoon period ends abruptly,
and the market enters a period of disillusionment. In this phase, the offshore
projects that were initiated in haste will fail to deliver on their promises and
an internal backlash will ensue. We are beginning to see some evidence of a
pullback with recent decisions by Dell and Lehman Brothers to pull their
offshore help desks back in-house. The companies that aren't serious about
offshore outsourcing at this point will begin to retreat and either reevaluate
their strategies or cancel their offshore plans altogether. Serious companies
continue to execute on the concept while the dilettantes scale back their
offshore operations.

Consolidation and assimilation. Following the period of despair is
a period of consolidation, during which the weaker vendors and me-too companies
exit the market. We saw similar behavior in the e-commerce market: The market
went through a period of consolidation and, in the last year or so, finally
appears to be on the Slope of Profit. Many companies now view e-commerce as just
another initiative they have to undertake. In other words, e-commerce has been
assimilated and has become part-and-parcel of doing modern-day business. We
expect the same to happen with offshore operations around 2007.

What does this mean for you? History shows us that corporate strategies tend
to be volatile and closely follow the economy. If the economy recovers,
we'll see the offshore juggernaut slow down. If economic recovery falters,
offshore outsourcing is going to accelerate. In the long term, like the
manufacturing migration to the Pacific Rim countries, business process and IT
offshore outsourcing is bound to happen. There will be hiccups along the way,
but the macroeconomic trend is pointing toward IT and business process
globalization.

But the nature of offshore outsourcing is changing. In our research and
consulting work, we're seeing five distinct trends for 2004: